Prime Cost Analysis

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Note to workings (Prime cost (direct costs) – To max 3 marks):

Direct costs are cost objects that are directly attributable to the finished product, these can be direct materials, direct labour and direct expenses related to the production of the finished product. Prime cost is the total of all direct costs (material, labour and expenses).

Quantity x price rate = total
E.g. for machining department ‘Carom’:
450 x 12 = 5,400 1,200 x 8 = 9,600 2,230+5,400+9,600=17,230

Total prime cost for Order 2169 ‘Carom’: 17,230+8,370+9,650 = 35,250
Total prime cost for Order 2170 ‘Horal’: 12,900+14,480+11,370 = 38,750
Total prime cost for Order 2171 ‘Pecan’: 12,600+16,960+16,640 = 46,200

To max 3 marks for accurate completion of this table:

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Gross profit will be less for marginal by £7,820 however removes the loss of £6,102 for the gross profit in the absorption system. In conclusion in terms of gross profit based on the marginal costing, Pecan should not be removed, it is expected to make more profits if kept. The absorption costing is more complex to operate and does not help much in decision making in comparison to marginal. Gross profit in the absorption system would also be higher if Pecan is removed increasing by £6,102. Overall it really depends, marginal only takes into account variable manufacturing costs whilst absorption takes into account all manufacturing costs (both fixed and variable as cost of production). If the firm wishes to be prudent and fair then the lowest gross profit should be considered which the marginal figure with the lower profit which therefore mean product Pecan should be kept. However the traditional method of absorption costing still involves critics of choosing the appropriate (can be subjective) overhead recovery rates, the need of allocating the overheads, indirect resource costs are not shared fairly between resource users and absorption isn’t a scientific technique. The marginal also suffers from focus on overhead recovery which can lead to only optimal short term decision and potential of …show more content…
Followed by identifying factors that causes the cost such as cost ‘drivers’, something that drives or changes the cost of a particular activity. Afterwards the total quantity of cost drivers available per period is established. When measuring activity drivers, it is advisable to use existing information for activity drivers since it can be expensive gathering information. The information collected should be about the activity drivers that are used to allocate secondary cost pools to primary cost pools and primary cost pools to cost objects. Using activity drivers to allocate costs in the secondary pools to primary

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